BGC Partners, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2013. The filing identifies the registrant as BGC Partners, Inc.; this differs from the request metadata’s “BGC Group, Inc.”
Business context
BGC is a global brokerage and financial-services company operating Financial Services and Real Estate Services segments. Its activities include wholesale financial brokerage, trading and related technology, and commercial real estate brokerage and management services.
Financial results
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $433.3 million | $440.3 million | $2,071.5 million | $1,284.8 million |
| Operating income before taxes | $42.7 million | $3.6 million | $264.6 million | $27.0 million |
| Consolidated net income | $32.0 million | $1.0 million | $172.1 million | $17.1 million |
| Net income available to common stockholders | $25.3 million | $(0.5) million | $66.8 million | $9.7 million |
| Basic EPS | $0.12 | $0.00 | $0.36 | $0.07 |
| Operating income before tax margin | 9.8% | 0.8% | 12.8% | 2.1% |
Nine-month revenue and profit comparisons are dominated by the $723.1 million divestiture gain recorded in 2013. Excluding that gain, the reported totals are not directly comparable on their face. Q3 revenue declined 1.6%; brokerage revenue fell 7.4%, partly offset by real estate growth and $31.9 million of NASDAQ OMX earn-out revenue. Q3 total expenses fell 10.5% to $390.7 million.
Q3 Financial Services revenue decreased 4.1% to $280.6 million, while pretax segment income rose 21.1% to $53.6 million, primarily on lower expenses. Real Estate Services revenue increased 7.0% to $145.8 million and pretax segment income rose 38.6% to $13.6 million. For the nine months, Financial Services revenue decreased 2.7% and pretax income decreased 2.9%; Real Estate Services revenue increased 30.0% and pretax income increased 44.0%.
Cash flow and liquidity: Nine-month operating cash flow was $102.6 million, versus $95.7 million in 2012. Investing activities provided $543.1 million, mainly reflecting $575.3 million of net divestiture proceeds; financing activities used $274.9 million. Cash and cash equivalents were $757.9 million at September 30, versus $388.4 million at year-end 2012. Management’s broader cash-position measure, including marketable securities and unencumbered securities, was $826.9 million.
Debt: Notes payable and collateralized borrowings totaled approximately $423.0 million, including $150.0 million of 8.75% convertible notes payable to Cantor. The $130 million revolving credit agreement had no borrowings outstanding and matured October 23, 2013. Total liabilities were $2.14 billion; the filing does not provide a conventional current ratio or a single summary liquidity ratio.
Margins and distributions: Q3 consolidated net margin was 7.4%, compared with 0.2% a year earlier; nine-month net margin was 8.3%, compared with 1.3%. These reported margins include the effects of significant unusual items. Dividends declared were $0.12 per share in Q3 2013 versus $0.17 in Q3 2012. The board declared a further $0.12 quarterly dividend payable December 2, 2013.
Material changes and unusual items
- On June 28, 2013, BGC sold its on-the-run electronic benchmark U.S. Treasury platform and related assets to NASDAQ OMX for $750 million cash, subject to adjustments, plus a contingent earn-out of up to 14,883,705 NASDAQ OMX shares over 15 years. The reported pretax gain was $723.1 million. BGC retained other Treasury and financial-market businesses.
- The earn-out is conditional on NASDAQ OMX meeting an annual revenue threshold. BGC recognized $31.9 million of earn-out-related revenue in Q3 and reported the corresponding shares as marketable securities.
- The Global Partnership Restructuring Program exchanged or redeemed approximately 77 million partnership units for approximately 45 million Class A shares, including approximately 39 million restricted shares. BGC reported an approximately 32 million reduction in fully diluted share count and approximately $465 million of non-cash compensation charges, including a $160.5 million reserve against employee loans.
- Class A shares outstanding rose to 178.9 million at September 30 from 123.9 million at December 31, 2012, principally reflecting partnership exchanges; those exchanges did not increase fully diluted shares as described by the company. The Q3 fully diluted weighted-average share count was 355.2 million.
- At September 30, $200 million was invested in an asset-backed commercial-paper program arranged through Cantor-affiliated entities. The approved program limit was $350 million, creating related-party and investment-counterparty exposure to monitor.
Outlook, commentary and risks
- Management said it remained on target to reduce overall expenses by at least $50 million annualized by year-end 2013, compared with the second-half 2012 run rate, and expected a further approximately $50 million of annualized cost reductions in 2014 to improve Financial Services profitability. These are management targets, not guaranteed results.
- Management expected to maintain the regular $0.12 quarterly dividend for the foreseeable future and said divestiture proceeds could be used for debt repayment, acquisitions, organic investment, or share and unit repurchases.
- Management described Financial Services market conditions as challenging: subdued volatility and trading volumes, quantitative easing, bank capital requirements, and regulatory changes weighed on activity. Real Estate Services benefited from acquisitions and improving commercial-property conditions.
- BGC began operating its Swap Execution Facility on October 2, 2013. Mandatory compliant execution was not expected to begin until Q1 2014; adoption, liquidity, trading volume and demand remain uncertain.
- Material litigation includes a FINRA arbitration in which Tullett-related claimants seek at least $779 million in compensatory and $500 million in exemplary damages, plus other relief. Hearings had concluded and post-hearing briefs were filed; closing arguments were scheduled for November 2013. BGC said it had substantial defenses and that current pending matters were not expected to have a material adverse effect, but outcomes cannot be assured.
- Other key risks include realizing the value of the contingent NASDAQ OMX earn-out, market and counterparty risk, regulatory capital constraints, operational and technology disruption, foreign-exchange exposure, and potential difficulty obtaining acceptable financing. The company reported $330.1 million of net assets held at regulated subsidiaries, which can constrain access to capital.
Important facts for investors to verify
- How much of reported earnings and cash generation is recurring after separating the divestiture gain, earn-out revenue, restructuring compensation charges and employee-loan reserve.
- The value and collectability of future NASDAQ OMX earn-out shares, including annual revenue conditions and share-price exposure.
- Delivery, restrictions and eventual sale potential of restructuring-related shares, and the effect on fully diluted share count and employee retention.
- Execution of the stated cost-reduction targets, trends in Financial Services trading volumes, and profitability of the expanding Real Estate Services segment.
- Status and financial exposure of the Tullett-related proceedings and other legal or regulatory matters.
- Post-maturity replacement of the revolving credit facility, debt repayment plans, and liquidity or credit exposure from the Cantor-affiliated commercial-paper program.